Thursday, January 31, 2008

hikes from my watchlist

Three stocks that are on my watchlist, but that I do not hold, just raised their quarterly dividends.

  • TransCanada Corp. (TRP) - hiked to $0.36, a raise of 6%
  • United Parcel Service (UPS) - hiked to $0.45, a raise of 7%
  • Canadian National Railway (CNR) - hiked to $0.23, a raise of 10%

Two of these companies are extremely economically sensitive, while one is certainly not.

Remember, you can always see some of the latest dividend increases in Canadian and U.S. markets by clicking on the 'see latest hikes' link on the right panel of themoneygardener.

Wednesday, January 30, 2008

my favourite graph

Of all the Excel charts and graphs that I keep in managing our personal finances and investments, I must admit I am partial to one. I have explained previously how powerful I believe dividends can be, as well as how I consider them crucial to our investing philosophy long term. Dividend increases mean more money in your pocket, and they have the added benefit of being one of the more permanent aspects of investing. The graph below is immediately affected in this relatively permanent way every time a company that we own raises their annual dividend, as well as every time I add new shares of a dividend paying company to our non-registered portfolio. It is this relative permanence of value that really has me routing for this graph to rise week to week and month to month.

Current Total Annual Income From Investments Per Year = $1,523
Current Total Annual Income From Investments Per Month = $126.91
Current Total Annual Income From Investments Per Day = $4.17

One Year Income From Investments Growth Rate = 390%

The graph is plotted at the end of each month.

Tuesday, January 29, 2008

diaper mayhem

Expenses that I always think of as key when trying to save money are those that are repeating. Those little repeating purchases that never end, like gasoline, dishwasher detergent, and even toilet paper, can really add up over time and not allow you to keep the money you want to save, invest, or spend on more worthwhile pursuits. They may at times seems trivial, but these small repeating expenses can pull you down like an anchor when you are trying to move ahead financially.

Becoming a parent, the first new repeatable expense that really kicks you in the a$$ (pardon the pun) is diapers.

Now keep in mind, I have been a parent for less than two weeks, so I am speaking from my very limited personal experience. Here is how I see the situation so far:

The Contenders:
Huggies - by Kimberly Clark (KMB)
Pampers - by Procter & Gamble (PG)
Teddy's - Loblaws Private Label (L)
Kirkland Signature - Costco Private Label (COST)
Parent's Choice - Wal-Mart Private Label (WMT)

Our Preference:
It did not take us long when we were filtering through the diapers we were given by friends before our son was born, to realize that Pampers are the best. I am not sure if they are just a better product, or if this is unique to a baby's shape, but we have found that Pampers not only fit better but work better. The Pampers advantage over Huggies is so pronounced that I am afraid I do not want Huggies no matter what the price.

I've heard negative reviews of each of the above brands of diapers with the exception of Pampers.

The Problems:
I fail to understand why Pampers size 1 diapers (which are made for babies 8lb - 14lb) are not available in bulk sizes. As far as I can tell the largest quantity these are available in is about 90. Considering we probably go through about 8 - 10 diapers per day, I would welcome a 256 pack.

I have heard from several sources that Kirkland Signature from Costco are actually Huggies private label which makes a lot of sense since Costco only sells Huggies, aside from these. My fair Costco, you have disappointed me for the first time...I forgive you..

The Numbers:
Kirkland Signature at Costco bulk pack - $0.15 / each --------- $1.50 per day
Pampers at Zehrs (Loblaws) on sale = $0.17 / each
Pampers at Zehrs (Loblaws) = $0.19 / each
Pampers at Wal-Mart - $0.27 / each ----------------------- $2.70 per day
Teddies at Zehrs (Loblaws) = Not Available
Parents Choice at Wal-Mart = Not Available

As you can see, diaper costs can really add up. I imagine that if I just blindly purchased my favourite diapers from any store, at any quantity, I could easily end up spending about $5.00 / day, or $1,825 annually on diapers.

The Conclusion:
I'll admit it - I am a slave to the Pampers brand, I want to know where I can buy these little puppies the cheapest per diaper. So far the winner is Zehrs, which is surprising. Any suggestions?

I welcome much participation in the comments section here by fellow diaper geeks...I know you're out there...

Monday, January 28, 2008

going global

Lately I have been hearing whisperings from the business news media with respect to the idea that the global economy might be slowing. We've all heard the ongoing chatter about the U.S. economy slowing, and whether or not it is going into recession, but now the talk seems to be drifting to global themes. Perhaps the U.S. economy trouble will cause the global economy to slow. I'm not sure what will happen, but I'm pretty sure someone forgot to tell heavy equipment maker Caterpillar (CAT), and conglomerate General Electric (GE). Both of these enormous global companies announced earnings recently and these were the results and forecasts...

GE - profit up 15%, 2008 earnings projected to rise at least 10%
CAT - profit up 11%, 2008 earnings projected to rise 5% - 15%

It is interesting to see that for the first time GE's revenue scales tipped to international, accounting for more than domestic dollars did. Also CAT explained that booming overseas demand made up for slowing U.S. sales. These two companies are really taking advantage of global growth to keep the earnings growth chugging along despite U.S. weakness. There are probably countless other examples, (Honeywell (HON) & Schlumberger (SLB) being two) of companies where this compensation is occurring, and we should see more to come as earnings come in.

Saturday, January 26, 2008

goal # 1 progress report

In a post back in November, 2007 I disclosed # 1 of our 4 goals for our non-registered portfolio.
Goal # 1 is : Save an average of $1,000 / month, to be added to this portfolio.

I thought I'd provide an update on our progress towards this goal since we are now a solid 2 months into my wife's year long maternity leave, which caused our employment income to decrease dramatically. Here are the results so far:
--------- December, 2007 savings = $1,351 -----------------
----------- January, 2008 savings = $1,518 -----------------

This is obviously a great result as these two months combined provide a buffer where we could save $130 for one month and still meet our goal. I am seeing some clouds on the horizon though, as we need to purchase a new set of tires for our car next month which will eat up a good chunk of potential savings. I will post soon with an updated Household Savings Rate (HSR), based on our new income and recent savings levels.

Friday, January 25, 2008

10 secrets for my subscribers

the moneygardener has reached 100 subscribers!

Subscribers are people who are subscribed to my blog through some sort of syndicated reader which makes it more convenient to read multiple blogs regularly. Thanks to all that have subscribed to this blog feed, and in honour of the 100 of are the top 10 secrets I hold true about my investing and personal finance style that may seem counter intuitive, and that you'll rarely hear in the mainstream media. That's one secret for each 10 subscribers!
  1. The Canadian Economy does not like me.
  2. I am praying for a stock market Crash.
  3. When investing I like Brands, when shopping I like Private Labels.
  4. I'd rather take risks to aim for a Higher Return long term, than get a guaranteed risk-free return now.
  5. My ideal holding period for my investments is Forever.
  6. Dividend Increases make my day.
  7. I hope stocks Underperform in the short to mid term.
  8. I like Boring Stocks, operating in really boring industries with relatively predictable cash flow.
  9. I'm happier if my dividends go up and my stocks stay flat, rather than if my dividends stay flat and my stocks go up.
  10. I'd like to Benefit from Older People before I become one.

Thursday, January 24, 2008

my investing philosophy

I am of the opinion that in order to be successful every long term investor requires some type of 'investing philosophy'. Simply put, these are statements that define my behaviour as an investor for the long term. This philosophy is the backbone my strategy as a whole.

It is especially important to have some investing rules to live by when the markets are as volatile as they have been lately. With the loud business media, falling markets, whining analysts, and frightened friends and colleagues all ringing in your ears - these statements will be your enduring battle cry that pushes you forward.

Here is my philosophy which can also be found on the right panel of this blog...

1. I am foremost a buyer of securities and seldom a seller, with a stalwart view to the long term.
2. I will only buy stocks that I would average down on. 'Average Down' - Means I will buy the same stock at a lower value to increase my holding and at the same time lower my adjusted cost based on the holding.
3. I will be patient, and disciplined, and always stick to my system.
4. I never worry or panic, and I always remember my initial reason for purchasing the stock in the first place.
5. Dividends are half the journey; meaning that a large chunk of total returns will come from dividends. It is also important to remember that dividends are always more stable than their underlying share values, and that the growth of dividends over the long term has a powerful affect.

I refer back to these statements sometimes to ensure I am on staying on the right track. Notice how there are no real specifics here, however the generalities really lend themselves to guide a certain mode of actions. Emotions can often crop up in an investor which one did not realize was present. These emotions can often lead to reckless actions or actions that take you away from your philosophy and therefore away from your goals. I find that having an investing philosophy in writing like this helps you combat these emotions, and aids you in being a 'solid Pine tree' among a plantation of withering deciduous shrubs and wavering annual grasses.

Wednesday, January 23, 2008

going out of business sale

Every now and again a stock gets so cheap that you have to scratch your head. I realize that there are two sides to every trade, and for every buyer there is a willing seller, but who was selling shares of Canadian clothing retailer Reitmans Ltd. (RET.A) today around $15.50? I don't believe Reitmans is going out of business, yet it seems the market is holding a 'going out of business sale' on the stock. Unless someone out there knows something that I don't know, which I hope is not possible, then in my opinion this is absurd.

My view on Reitmans here.

The price the market was asking for shares of Reitmans today was too attractive to pass up. I gobbled some up at $15.57. At this price they were trading under 11x earnings and yielding over 4.6%. For a company with return on equity and assets north of 18%, no debt, and a solid history of earnings and dividend growth this is the utter definition of cheap. My discounted cash flow model indicates that at $15.50 the market is pricing 3 - 4% earnings growth for the next 10 years from Reitmans. It felt good to add those new dividends into my annual income from investments flow. I'm always a sucker for a good sale, especially one that pays fat dividends.

With this purchase Reitmans now makes up about 6% of my portfolio. I'm now 15% weighted in consumer products.

Tuesday, January 22, 2008

talking the dividend talk

"We have not changed our philosophy on the dividend, and we are proud of our record of 30 years of annual increases in the common share dividend."

This is an approximate quote from Bank of America (BAC) CEO Ken Lewis on the company's fourth quarter conference call this morning where they announced a profit drop of 95% in the quarter. Apparently in maintaining appropriate capital ratios going forward Lewis may choose to pare back share repurchases, raise capital, etc.; he seemed to indicate that the dividend is either safe or is regarded as sacred to the company's plans. Lewis also projected 2008 profit to be well above $4/share, whereas analysts expect $4.33. 'Well above' $4 per share in profit is a nice increase on 2007's EPS which is now finalized at $3.30/share. Lewis did mention that this is all barring 'a new market shock'.

While this can not be misconstrued as 100% assurance that Bank of America will not cut their dividend, the type of language and emphasis Lewis used has me taking notice. Being a dividend growth investor for the long term, I get really interested when a great company with temporary problems like BAC is yielding 6.8%, and is confident enough to put priority on their long term dividend growth philosophy. This statement tips me off that BAC is serious about maintaining their dividend and will use other means necessary to maintain capital ratios.

Based on this positive dividend and earnings growth guidance, I may add to my position in the coming weeks.

Monday, January 21, 2008

the bear approaches

Wow, what a week to take off from posting!

The markets are now in what certainly can be described as 'free-fall'. Whether capitulation has occurred yet remains to be seen, but one has to assume that there are some investors out there that have had enough and have bailed out of stocks all together for the time being. Looking at the charts for many of the main indices and some of the stocks that I follow indicates that we are in dangerous territory. In most cases resistance points have been blown through, and values are dropping like stones. Here are some examples:

XDV (Canadian Dividend Payers ETF) broke down below 2006 lows, and is down 8.3% in the last week.
IGM Financial (IGM) broke down to 2006 lows, and is down 8.2% in the last week.
The S&P 500 Index broke down below 2007 lows, and is down 5.4% in the last week.
Yellow Pages Income Fund (YLO.UN) broke down to 2004 levels, and is currently yielding 9.1%.

These are starting to look like the type of market conditions which I have prepared for psychologically by education myself and learning the mechanics of dividend growth investing. Seeing the markets really take a turn like this might hurt in the short term, however just as I described in my fear the bear post, long term this pain should turn into pleasure.

In order to realize my long term goals I will:

1. Stick to my strategy of buying quality, dividend growing stocks when I deem them to be cheap. (My problem now is that I don't have enough cash to buy what I want)

2. Accumulate cash and deploy it into stocks that fit the bill, no matter where the market goes.

3. Watch my annual dividend stream grow month after month and look to that income stream as one of the factors that motivates me to stick to my knitting.

4. Take solace in the fact that I can now buy more dividends for each dollar I deploy than I could at any time in my investing career.

Too many cheap stocks, too little money. I will have to be selective here and look for deep value in quality names with likely dividend and earnings growth despite the current conditions. If I can concentrate on dividends and dividend growth, long term things should fall into place and I will be rewarded.

Friday, January 18, 2008

week off - baby

In case anyone happened to notice I am taking the week off from posting.

We welcomed a baby boy into the family on January 16.

Monday, January 14, 2008

supercharged dividends

Recently there have been a few notable dividend increases in Canadian and U.S. markets. These companies recently "supercharged" their dividends by raising them more than 20% per annum.

Telus Corp. (T.A) ------------------------ +20%
Automatic Data Processing (ADP) -------- +26%
Corus Entertainment Inc. (CJR.B)-------- +20%
Stryker Corp. (SYK) --------------------- +50%
Astral Media Inc. (ACM.B)---------------- +25%
Alimentation Couche Tard (ATD.B)------- +40%
EnCana Corp. (ECA) ---------------------- +100%
Rogers Communications (RCI.B) ---------- +100%

Saturday, January 12, 2008

net worth update january, 2008

Results for the 2 months ended January 13, 2008.
  • Debt/Asset Ratio moved down from 0.55 to 0.54
  • Net Worth moved up 2.4%
  • Total Assets increased 0.7%
  • Total Liabilities decreased 0.7%
  • House Value / Tot. Assets moved down to 73.0%
  • Non-registered portfolio grew 3.8%

Our progress on net worth here remains positive, however negative market returns held us back quite a bit this bi-monthly period. The S&P 500 index is actually down over 3% since November 15, when I last updated our net worth. The market's influence is reflected in the results below:

  • Non-reg. port. posted a 3.8% gain (slowest gain ever recorded.)
  • Total assets up 0.7% (slowest gain ever recorded (tied with Nov.))
  • Wife's locked in retirement account down 2.5%
  • Wifes' RRSP down 2.7%

There are interesting times in net worth tracking ahead as the market continues to turn over, and we embark into a period of drastically reduced employment income due to my wife's year long maternity leave, which began on December 1, 2007. Below is our graph of net worth over the past several months. Note that the graph is flattening out toward the present indicating that our net worth growth has been slowing as of late.

Friday, January 11, 2008

the price of clarity

If anyone ever tells you that investing is 100% safe, they are lying to you. There are risks present in every investment, and you are taking a risk every time you buy something. Whether you fashion yourself a stock picker, an indexer, or some combination of these investing styles, chances are that you are going to have to make a decision as to when to buy. You could be choosing when you should buy a particular Exchange Traded Fund (ETF), or choosing when to buy a stock that you believe is beaten down or undervalued in some way, relative to where the price should go in the future. Either way you are placing a bet as to the future of that particular security.

The sandbox that I've decided to play in consists of financially stable, established companies with strong brands, favourable demographics, and histories of swift earnings and dividend growth. I believe by making this choice I have inherently taken some of the risk out of the equation. Therefore after I chose the companies that I would focus on, I was stuck with the conundrum of when to buy them. In creating a modelling process where I use a discounted model to determine reasonable prices that stocks should be worth, I have established a framework in order to value firms. I don't expect my models to tell me when a stock is dirt cheap, and therefore guarantee the success of an investment. The purpose my models do serve is to provide a kind of framework in order to prevent me from overpaying for a stock. They also show me what type of earnings growth the market is pricing in for a particular company, so at the very least they tell me what is expected from the company at it's current price. Put another way, how does the market feel about the prospects of this company going forward?

Often times the uncertainty around an industry or a particular company is the key driver that causes bad stock prices to stick to good companies. The more I follow investing and the market, the more I have discovered that bad news often hurts stocks much less than uncertainty (or the expectation or possibility of bad news). I've noticed that many investors take the attitude that during these periods of uncertainly it is always a wiser and more efficient call to wait for the dark clouds to part before buying. It is my opinion though that for a long term investor, uncertainty is a blessing in disguise. Often times if you truly want to obtain the lowest cost on an investment you need to buy during that awful period of uncertainty. Sure, you will always get a chance to buy the stock or ETF after it is discovered where all of the bodies are buried; however, usually by that time much of the market has beaten you to it, with the same information, or they dive into the stock earlier with a little less knowledge than would be ideal.

Personally in a lot of cases, with the type of stocks I follow, I feel that if you are long term you might be better off diving in with less knowledge than ideal, instead of waiting for the perfect moment of clarity. See, because when you wait, that perfect clarity is always reflected in the stock price, whereas dark clouds usually come on the cheap.

This type of strategy won't work all the time; nothing does. Sometimes you are better off waiting for some degree of clarity based on your personal thoughts and analysis of the stock.

Here are some examples right now where I believe there is high uncertainty, and thus low prices...

Home Depot (HD), Lowes (LOW), Masco (MAS), Reitmans (RET.A)
Citigroup (C), CIBC (CM), Bank of America (BAC)

Wednesday, January 9, 2008

cheapest, safest dividend streams

I currently hold shares in the large U.S. institution Bank of America (BAC). When I bought BAC I explained my rationale that as long as the company does not cut its dividend I would be a happy camper holding the shares. The reason for this is due to the fact that BAC was yielding around 6% and has a legendary history of swiftly growing their dividend ever year. While the share price drifts with the ups and downs of investor sentiment, I am still paid 6% of my investment annually; on time every quarter. 6% is certainly nothing to sneeze at, but this dividend does come with some risk as we all know the U.S. financial system is in peril currently.

So with the markets in free fall, and dividend yields increasing everywhere you look, as a dividend growth investor it really begs the question...

Where can I find the cheapest, safest dividend stream out there in the equity market?

In simple terms, how can I take advantage of market weakness by purchasing vehicles that have the utmost certainty of paying me high, and preferably ever-increasing dividends for the long term?

Obviously finding these companies is not an easy task. One must analyze much about the company including cash flow, debt levels, future outlook, competitive position, and potential threats. It is difficult to determine whether a dividend is at risk or not, or might be at risk in the near future. So which companies might fit the bill? Which stocks offer the highest, safest yields, exluding trusts, REITS, and LPs? I'm asking you!

The higher the yield, the cheaper the dividend stream Perhaps these firms might be worth a look, these are two of my candidates for 'cheapest, safest dividend stream'

Pfizer (PFE) - U.S. pharma. company yields 5.4% and has always been a swift dividend raiser, including very recently. Although the company has little growth, they have a great balance sheet.

U.S. Bancorp (USB) - U.S. banks are obviously in a bad spot right now but USB just recently raised their dividend by 6% to now yield 6.1%. Warren Buffet also likes USB.

Rothmans (ROC) - This Canadian tobacco company yields 5.6%, and I hear their product is quite addictive. They also just raised their dividend by 16%.

Who are your candidates?

Tuesday, January 8, 2008

fear the bear?

Bear Market: A market condition in which the prices of securities are falling or are expected to fall. Although figures can vary, a downturn of 15-20% or more in multiple indexes (Dow or S&P 500) is considered an entry into a bear market.
Recession: A significant decline in activity spread across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).

These two terms are usually taken in investing to have negative connotations. Anyone who is long the market probably does not want either one of these scenarios to occur. However, is this reaction really justified? If a bear market or recession or both occur will the net long term results on my investments be negative? Is this something I should be afraid of?

Well, I've never invested through either of these scenarios, so I can not be sure. Let's assume that we went into a bear market in equities while the North American economy dropped into recession. How would this affect my non-registered portfolio? These might be some of the likely advantages and disadvantages of such a situation:

  • Portfolio paper value might shrink for the duration of the bear market due to negative investor sentiment and shrinking earnings growth.
  • Company earnings from North American activities might grow slower or even decline for the duration of the recession.
  • Company dividend increases might grow slower, stay flat, or even decline for the duration of the recession.
  • Commodities could fall substantially, due to falling demand, causing stocks like Petro Canada (PCA) to plummet.
  • Watching the daily happenings in the market would be depressing.
  • Total market returns for this period should be negative, and could be below -10% annually.
  • This period will be a bad time to sell investments.


  • Quality dividend growing stocks may fall to very low levels causing buying opportunities. These stocks may be able to be bought for low prices, and high yields.
  • Some stocks like Procter & Gamble (PG), Johnson & Johnson (JNJ), and Walgreen (WAG) may outperform due to their defensive nature and non cyclical earnings streams.
  • Non-North American business should still grow, albeit slower.
  • Dividend payments will still come, and dividends will still grow, perhaps at a slower pace.
  • Energy prices might fall causing a significant reduction in input costs for most companies.
  • A bear market and recession are usually followed by a period of growth and prosperity.
  • Long term this period should actually boost my returns if I continue buying. In other words, this period should be a good time to buy investments.

Looking at things this way, strictly from an investment perspective, I hope this occurs. To me, the advantages outweigh the disadvantages if and only if I behave in this way:

  • Do not sell any investments
  • Keep buying companies that grow their dividend every year, that I deem to be cheap
  • Don't let bad market sentiment get me down

The earnings of the stocks that I currently own should be fairly resilient to a recession. I would imagine my paper losses would be the greatest on economically sensitive stocks like Petro Canada (PCA), Reitmans (RET.A), General Electric (GE), and Scotts Miracle Gro (SMG). Several of the remaining stocks might actually be viewed as safe havens in times of trouble.

What we should probably fear more as investors is a bubble situation as occurred in the late 1990's. Although a different set of adaptive behaviour might be required in a bubble. Judging by stock valuations currently, I am pretty sure we are no where near a bubble.

U.S. recession is here already?

Monday, January 7, 2008

pc financial - (andy)

As promised I have enlisted the help of a guest poster to cover off some topics that are of interest to him. I'm not certain how many posts I will be able to get out of him, but the more the better as he is a financially smart individual. Let's just say when it comes to personal finance and the road to wealth I believe he 'gets it'. Without further adieu, let me introduce this thirty-something man named Andy (not his real name).

With the major Canadian banks constantly competing for everyone’s business, I’ve decided to use PC Financial as my preferred financial institution, and below are the main reason why:

  • No Fee Chequing Account - With the major banks offering various personal chequing accounts with monthly fees ranging from $3.95/month up to $24.95/month, it’s hard to believe that more people aren't switching over to a PC chequing account. With zero fees, a person can make as many transactions as they wish and not pay a single penny for them. I recently purchased a DVD from a major electronic store with a Christmas gift card and unfortunately the DVD cost 12 cents more than the amount available on the gift card. I had absolutely no cash on me and there were about 10 people in line behind me so the option of running out to the car to find loose change was out of the question. Luckily I had my PC banking card with me; swipe the card, punch in my code, and out the door I walk with my DVD and I never had to worry about a transaction fee.

  • High Interest Savings Account - With an interest rate of 4.10% it’s a great place to park my money while I decide which stocks or ETFs I want to purchase through my discount brokerage account. All I need to do is hold a daily balance over $1,000.00, and I receive one of the highest interest rates available on the entire amount, plus a bonus interest amount on my balance on each annual anniversary date.

  • Low Cost Personal Line of Credit - The cost of borrowing money is only prime + 1.25% (currently 7.25%). This is an incredible rate when comparing it to the major bank’s lines of credit.

  • Low Initial Cost for Secured Line of Credit - Most banks charge a one time cost of up to $450.00 to set-up a secured line of credit. PC charges only $150.00. I personally do not have a secured line of credit as I do not believe in paying the fee, since a personal line of credit costs nothing to set-up.

*PC Financial did not compensate Andy or I for this post.

doubled Bank of Nova Scotia position

I started a position in the Canadian bank, Bank of Nova Scotia (BNS) at around $47.50 during a steep sell off back in August, 2007. For my comments on the bank, please see my 'bought some BNS' post.

Today I added to my BNS position by doubling my stake in the internationally oriented bank. I paid $47.39/share today; therefore before fees I bought the bank at a yield of 4.0%, and a P/E of 11.7x earnings. My models suggest that Scotia is very undervalued at it's current price. The stock is currently priced for anemic growth going forward. I believe it offers compelling value down here at its current level.

Bank of Nova Scotia has a superb earnings growth record, is very efficient, and is diversified between domestic operations and significant non-U.S. assets. They have also proven themselves as a swift grower of dividends over the long term.

Sunday, January 6, 2008

the yield effect

An interesting article from the Motley Fool called Bear Market Buys, points out that when stock prices drop dividend yields increase because you are buying the same stream of dividends for a lower price point.

For example if stock ABC is paying $2.00/share in dividends, it would yield 4.0% when trading at $50/share, but yields 5.0% when trading at $40/share.

This is a key scenario that really allows you to take advantage of the power of dividend growth investing. Your success though, will depend on whether or not the company you bought continues to raise their dividend at a strong pace in the years ahead. If you buy a company that has an inflated current yield relative to its historical average yield, but then the firm fails to raise dividends swiftly as they have in the past your returns will suffer. I usually only follow companies that have histories of strong annual dividend increases, so if a company is yielding higher than average currently there is still a reasonable expectation that they should continue to place a priority on raising dividends. Having the wherewithal to continue to raise dividends at swift rates (8-12% annually), is always the result of the company growing earnings at these same rates going forward. It really always does come back to earnings growth, as I explained in 'equity investing is earnings growth'.

In the process that I use to select entry points for stocks, dividend yield as compared with the historical average dividend yield is only part of the total picture. I thought it would be interesting though to show some situations that are developing with respect to dividend yields with some stocks out there that have great histories of dividend growth, and just might be ripe for the picking.

Here are a few examples where the current dividend yield is significantly higher than the average yield calculated over the last 5 years:

Bank of America (BAC)........... 5 year avg yield = 3.8% current yield = 6.4%
Pfizer (PFE)........................... 5 year avg yield = 2.6% current yield = 5.5%
General Electric (GE).............. 5 year avg yield = 2.6% current yield = 3.4%
Bank of Montreal (BMO)........ 5 year avg yield = 2.8% current yield = 4.5%
Manulife Financial (MFC)....... 5 year avg yield = 1.8% current yield = 2.5%
United Parcel Service (UPS).. 5 year avg yield = 1.5% current yield = 2.4%
Bank of Nova Scotia (BNS)..... 5 year avg yield = 2.9% current yield = 3.9%
Masco Corporation (MAS)..... 5 year avg yield = 2.5% current yield = 4.5%

* Canadian bank information are from the U.S. traded versions.

Saturday, January 5, 2008

patching the burnt hole in my pocket

Thicken My Wallet, drafted a great post this week called Cash is an Investment Category, where he writes of the internal struggle to not be fully invested. This post hit home for me as I have found that once my cash reserves hit a certain level, I start to seriously look for stocks on sale.

Patience is such a huge attribute that a successful investor needs. It is not always easy to allow cash to pile up in your portfolio when you're mind is constantly looking to the next stock that you would like to add to, or start a position in. After all, what am I doing; what have I set out to accomplish long term? I am investing for the long term, not stockpiling cash. That being said it is easy to see that throwing money at stocks whenever you have powder dry is not always the best strategy. There is something to be said for having patience, building cash positions, and attempting to use this cash to invest in beaten down stocks when there is 'blood in the streets'.

That being said, right now I am 3.1% cash so I am getting to the point where I can afford, fee-wise, to buy something. Coincidentally there was a fire sale this week on the markets, but I'm not sure the blood has hit the streets yet. I am not going to be hasty but here are the situations I am monitoring most closely currently:

1. Bank of Nova Scotia (BNS). I opened a position in BNS back in August of 2007. Currently my adjusted cost base on the stock is $48.39. Scotia closed Friday's trading at $48 even.

Yield = 3.9%
Price/Earnings = 11.9
Price / Book = 3.1
Last time stock traded at this level = August 16, 2007, the infamous date

2. Bank of America (BAC). I opened a position in BAC back in November of 2007. BAC announces earnings on January 22, 2008, which by all accounts should be horrendous. I really don't care though. What I do care about is their juicy dividend which they have raised nicely for a long while. Unknowns in investing can be a killer. I really wish I knew what the odds were for a dividend cut. If the odds are extremely low, then I would add to my position. Right now I am paying close attention to analyst, and BAC management comments to try to get a read on this, but I realize that there may not be any assurance.

Yield = 6.4%
Price / Earnings = 9.0
Price / Book = 1.4
Last time stock traded at the level = May of 2004!

Thursday, January 3, 2008

why net worth is not worthless

A few days ago a fellow blogger brip blap posted a well thought out article on his blog called net worth or worthless. Basically the article desribes brip blap's opinion that the personal finance metric, net worth is worthless and 'Net worth is a very difficult number to analyze, and the difficulty in analyzing it makes it a somewhat worthless tool for measuring progress in your financial life.' Having a differing opinion than Mr.blap, I thought I would rebut the idea that net worth is worthless with a rather lengthy post. Please bear with me, because after all, if I thought the metric was worthless I would not bother tracking it bi-monthly.

brip blap laid his argument out in a series of points which he numbered. I'll reiterate Mr.blap's point briefly before I give my case against the point. If you want more detail on brip's points, please visit his blog, which is by the way a good read.

1. You don't know how it's calculated
I feel that not knowing how individuals are calculating a metric, does not in itself make the metric any less useful. It just means the calculation method should be standardized. Let's suppose for a minute that 3 people were asked to determine their body height. The 1st person stood against a wall and awkwardly ran a tape measure up the wall and determined her height in inches. The 2nd person knew that his rug was 5 foot 6 inches across so he laid across the rug and measured the difference, while the 3rd person looked on his drivers license which was listed in centimeters because he was Canadian. So these 3 people used differing methods to determine their own height. Whether any of them arrived at their correct height is unknown. What is surely known is that their height is a relevant metric that can be measured and is certainly useful; just ask Shaq. Perhaps they should all be sent to their doctor to measure their height to the utmost accuracy. This method could be made to be an agreed upon, standardized method by using the same doctor and the same tools.

Also, of course one's home equity is an asset. This argument alone is probably fodder for another post but it seems really simple to me. If I own a $300,000 home outright but have $0 in other assets is my net worth $0? Of course it's not it's $300,000 because today I could sell the home, rent an apartment, fill the bath tub up with my new found cash and jump in....

2. A net worth of $200,000 means different things in a small town in Texas and in La Jolla, California.
I can't say I've ever been to La Jolla California, but it sure sounds nice (I think I've seen it on that show The House Wives of Orange County.) La Jolla sounds especially nice considering that I pumped gas today without gloves on and I couldn't wait for it to be over. I fail to see how where you live makes your net worth irrelevant. If you were able to ante up for a mansion in La Jolla, then good for you. You probably have more financial horsepower (potential earnings) than I do here in lowly old Brantford. Let's say my net worth was $200,000 and my friend Joe who incidentally lived in La Jolla had a net worth of 200K as well. How is this dollar figure any different? Who is better off Joe or me? A net worth of $200,000 can't really generate a substantial income no matter where you live. I might have a $200,000 house with a $100,000 mortgage and $100,000 in the bank while Joe has a $800,000 house with a $600,000 mortgage and $0 in the bank. I'd still say we both had a net worth of $200,000, and it's fair to say that we are on equal footing net worth-wise. Joe might pay more for an oil change than I do, but who cares, he chose to live there, his property value is higher, and he probably has a nice what? We both have the same opportunity to grow our net worth, and his dollars are worth the same as mine....well maybe his greenbacks are worth slightly less than my loonies but you get my point.

3. Net worth doesn't accurately measure cash flow generation
Correct, it does not, that is why it's called net worth. A compass does not accurately measure velocity either....move on.

The money that is present in net worth always has the potential to generate cash flow. At any time every dollar one owns can be coverted into common shares of General Electric (GE). GE will pay you approximately 3.4% of your money annually in cash.

4. Net worth also doesn't show risk
Again correct, but really why should it? Net worth also does not slice, dice and make julienne fries but it's only a personal finance metric. You could make it show risk by assigning a risk value to each asset and weight it all. Personally I think that is a bad idea because most people can't agree on a good definition of 'risk' anyway....

Overall I do not think net worth is the 'be all and end all', but I do believe it is the best tool we have to measure our financial health and progress. I don't care how you look at it, net worth is always meaningful, and improving one's net worth is always a financially positive action.

Wednesday, January 2, 2008

small cuts to fixed costs

As mentioned my wife is currently on maternity leave as we are expecting our first child very soon. Here in Ontario, Canada my wife is entitled to 50 weeks of paid employment insurance benefits. The benefit works out to about $369 / week after taxes, as she is entitled to the maximum benefit as per her normal salary which is well over $40,000 annually.

We are already seeing some reduced living (fixed) costs because of our new situation:
  • Auto Insurance - We informed our insurance broker of the fact that my wife is now off work, so she will not be commuting her usual 25km each way to work. Due to this change our insurance rate for that particular vehicle was dropped 17%, or $204 per year because the car is now on the policy as not travelling to work each day, which requires many less kilometers of insurance. This reduction in our fixed expenses would be roughly the equivalent of me getting a raise in employment income of about $300 per year before tax.
  • Auto Fuel - While my wife was employed, our combined monthly gasoline bill was coming in at about $250 - $300. Now that she is on maternity leave, I am expecting the same bill to come in much closer to $150 per month. This should equate to a savings of about $1,500 after tax dollars per year. For us to bring home the equivalent benefit of this savings in employment income I would probably need a raise of about $2,150 per year before tax.

All told, these two small travel related cost savers are tantamount to me obtaining a raise of $2,450 annually, or $204 / month.